April 17, 2012

Warren Buffett has become a political prop — and, perhaps, an object lesson in how business leaders, when they enter the political arena, are easily manipulated. Their efforts to “do good” are often twisted to suit the narrow interests of their political patrons. That’s the story of Buffett and President Obama.

Unless you live on Mars, you know that Buffett is America’s second-richest man (net worth of $44 billion, says Forbes). You also know that, a while back, he noted that his tax rate — the share of income paid to the federal government — is lower than his secretary’s. From this emerged the “Buffett Rule”: Millionaires should pay at least 30 percent of their incomes in federal taxes.

Let me state: I favor the Buffett Rule.

Let me also state: The proposal has done more harm than good.

With a progressive tax system — supposedly requiring the rich to pay more of their income than the poor — it’s indefensible that some wealthy people enjoy preferential treatment. It subverts any sense of fairness. And raising the top rate wouldn’t much hurt the economy if the rate isn’t punitive. To me, 30 percent seems reasonable. It’s lower than today’s top rate, 35 percent; and it roughly equals the top rate on capital gains (mainly profits from stock sales) in the late 1980s. That was 28 percent; the economy did fine.

But the Buffett Rule has done more harm than good because the Obama administration has exaggerated its significance and used it to distract attention from more serious problems: huge budget deficits and the sluggish recovery. The Buffett Rule fits Obama’s reelection strategy of emphasizing “fairness” and suggesting that, somehow, the wealthy are to blame for the deficits and the poor recovery.

It just isn’t so. Consider:

First, most millionaires pay high taxes. The Congressional Budget Office estimates that the richest 1 percent of Americans have an average tax rate, including payroll taxes, of 29.5 percent. (By contrast, the tax rate for the poorest 40 percent of Americans is 7 percent.) The same top 1 percent pays about 28 percent of all federal taxes. Buffett and some other super-wealthy are outliers, because their income is mostly from dividends and capital gains, which are taxed at 15 percent.

Second, enacting the Buffett Rule would barely affect the deficit outlook. From 2012 to 2022, the Buffett Rule would increase federal revenues by about $47 billion, estimates the congressional Joint Committee on Taxation. For the same period, the CBO reckons federal budget deficits would approach $8 trillion. The Buffett Rule would cut these deficits less than 1 percent.

Third, how the Buffett Rule would affect the economy is unclear. Higher taxes might dampen spending — or do the opposite if slightly lower deficits cut interest rates a bit. Some super-rich might move abroad. Whatever the effect, it’s likely to be small. In a $15 trillion economy, shifts of about $5 billion a year don’t amount to much.

But that’s not the administration’s message. “The Buffett Rule is something that will get us moving in the right direction towards fairness, towards economic growth,” the president recently said. “It will help us close our deficit.” Although Obama tossed in a caveat about needing other measures, anyone listening to his speech would have concluded that passing the Buffett Rule would be a big step forward.

Actually, serious deficit reductions would require cuts in popular programs, including Social Security and Medicare, as well as broad-based tax increases. Obama has been less forthcoming on these touchy subjects.

To his credit, Buffett has never claimed that his proposal would make a large dent in the deficit. It’s always been about fairness. Still, Buffett’s uncritical attitude lends credibility to Obama’s self-serving simplifications. The president cites “my friend Warren Buffett” all the time in advocating the proposal.

But Buffett’s enabling role pales compared with that of congressional Republicans. This week, the Senate rejected the Buffett Rule because most Republicans voted against it. The president was surely pleased. Their refusal to support any tax increase is an immense political gift. It allows him to pose as the protector of the middle class while casting Republicans as lackeys of the super-rich. For Obama, the Buffett Rule is better as politics than as policy.